The Compound and Friends - Correction Territory

Episode Date: March 18, 2025

On episode 183 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Joe Terranova to discuss: momentum stocks, recent market volatility, Joe's ETF, and much more! This episode is sponsored by Public. Fund your account in five minutes or less at www.public.com/compound Sign up for The Compound Newsletter and never miss out!: https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. All right, all right. Compound Nation make some noise. Let me hear you. Ladies and gentlemen, Michael Batnik.

What up? And now our very guest, Joe Terranova. Joe, come on in. All right. All right, first of all, welcome to the first ever future-proof citywide in Miami. Miami, make some noise, let me hear you. Woo! All right.

Wait a minute. What? First ever, your wife's in the audience. Yeah. What? First ever. Your wife's in the audience. Yeah, true. First ever. Sprinkles is here, so you guys have to applaud and make me look real good. Let's go.

Alright. Alright. Hey guys, I want to say a couple things and then we'll get right into the show. The first thing is, we are so excited to be here. It's so great to see everyone. I know for a lot of people, this is their first ever Future Proof event because we've been doing these on the West Coast.

If this is your first time at a Future Proof event, let me hear you make some noise. Wow. Wow. Pretty cool, right? All right. Guys, we have a very special guest today. You have seen him with me on the Halftime Report on CNBC.

He's been on CNBC for as long as I can remember, 2005, I wanna say? 2007. 2007, okay. He's also a regular on the Compound and Friends. Joe Terranova is the Chief Market Strategist and Senior Managing Director for Vertis Investment Partners, as well as a frequent contributor on CNBC.

Joe also developed the Terra Nova US quality momentum index in 2020, which provides exposure to large cap quality and momentum. Please welcome Joe. So anything going on these days in momentum stocks or not really? Well, just a little bit, a little bit of volatility, but I think it's really a strategy and a factor that it's completely misunderstood. So you and Michael are going to do a really good job in educating people about the value

of momentum. Absolutely. So, I think where we want to start is just this idea of, and we have a chart here, this is a chart kid Matt special it looks like. Shout out to Exhibit A. Michael walk the crowd through what we're looking at to set the stage. So the last couple of weeks were, traumatic might be too strong of a word, concerning. It was concerning. We had a sharp market sell-off, worse in the momentum names, which we'll get to later, and every single year something like this happens.

And every single year we think it's a bigger story than it actually is. Now, I'm not minimizing what's going on. I understand people are anxious, but the chart that we're showing is the average intra-year drawdown for the S&P 500 is, I think it's 14%, something like that. And we just had it, right? We felt 10%, okay, we did it. No big deal. I mean, maybe. Really fast though. Really fast. The diamonds represent the lowest point during the course of each year where we've seen stocks. And as you can see, the bars represent the actual year-end returns.

Almost none of the time does the stock market finish the year at its worst drawdown. You almost can't find more than a small handful of numbers. And this goes back to 1990. I promise you, if we pulled it back a few extra decades, it would be pretty much the same. These entry year draw downs are periodic. They're part of what we do for a living. Some would say they are the reason we have jobs

to begin with. And it's really important to not only not minimize how people feel while you're going through them but to provide context like this so that it doesn't feel that it's totally different from anything that we've seen before. Joe, I wanted to ask you what it's like managing a momentum portfolio in a situation where within 16 trading days, the market goes from a record high to a 10% drawdown because momentum was really at the heart of this particular pullback. So, the challenge is when you allocate specifically towards a single factor of momentum, you leave

yourself in a somewhat perilous position when you have these market declines. That's one of the reasons why I think you need to add an additional factor or even another factor beyond that. That's what I did several years ago. It's funny, Josh. We used to sit on the set of CNBC. This is 10 years ago. We'd be in Englewood Cliffs.

We'd sit there and back then we used to have a lot of analysts come on and the analysts would come on and they would talk about, pick the stock, whatever one you want to, IBM, whatever the stock might be. They'd come on and they'd say, well, we have all these reasons why we think IBM, valuation, potential revenue growth, technological innovation, and then they'd pull up the chart and the chart just goes from the lower left to the upper right. They'd leave, and I'd say to myself, that's the only reason they really like it. It's because the stock is going up. The price is driving their bias. The issue that I have is that when you're just looking specifically at price in market corrections, you lead yourself

at a perilous position. Momentum without a doubt, from a factor standpoint, is one of the leading factors over the last 25 plus years, but you need something more. You need that shock absorber to allow you to ride through the volatility. So when I see what we've witnessed in the last several weeks where you've got this reversal in momentum,

I kind of sit back and say, okay, all this reversal in momentum is doing is it's just going to ultimately land in a different place. It's just going to land in a different sector. It's just going to land in a different level of leadership within the market. So we're going to get to in the next session, what happens when momentum breaks. So we're going to put a mini pin in that. Let's get back to what's happening in the stock market. So Josh is a big wealth... What's the factor called? I don't know where you were going after the big. Wealth effect. Josh is a big guy. Josh is a really big... No, he looks good. Josh is a big

wealth effect guy, which is the idea that if your portfolio is going up, if your house is going up in value, then you're going to spend more freely. And there's obvious truth to that. Who would deny such a thing exists? The danger where we are today from the great Warren Pies is that because households are so exposed to equities, this could be dangerous. So what we're looking at here is Warren Paez calls this a negative wealth shock. And he says, because households are massively overweight stocks, you guys remember like the allocation to stocks have never been higher for US households? I don't know the number, 60% never been higher. So Warren says, because households are massively overweight stocks, the current 10% market decline has created a wealth shock equivalent to 12% of GDP.

So talk about it like a momentum break. He said 10% corrections are typical, but wealth shocks are rare. This economy is more vulnerable to a stock decline. So Joe, there's like a chicken and egg debate. Does the activity in the stock market ultimately impact how consumers spend? Or does the stock market react negatively because consumers have pulled back their spending? I'm in the former camp. In this day and age, the entire economy is built on 401k and I feel that when people

open their statements and they see they've made a lot of money in the last month, their proclivity to spend is higher and then it works. Unfortunately, we're about to learn it works on the way down as well. People pull back on the next thing they might spend on if they've just lost 10% in portfolio value. Where do you stand on that debate? It is all you are, you're prescient in this, and I've heard you say this on air for a number of years on CNBC. The economy is not the stock market. The stock market is not the economy. We've been in a

manufacturing recession, or we were in a manufacturing recession for the last 18 months in industrial stocks and making new highs. What drives consumer behavior, what drives corporate spending intentions is two things in the wealth effect, the value of your portfolio and the value of your home. Don't disbelieve the premise that the CFO sitting at a publicly traded company is affected by what's going on in their own corporate stock and in their own personal portfolio. That is the determining factor on where the economy goes, where consumer spending ultimately goes.

And the critical measure of it is duration. Because you could look back during the pandemic, and that was a V-shaped experience. That was a matter of weeks. Consumer behavior really didn't change very much, but when it's a punishing, prolonged process, time is your enemy, that's ultimately where you see the effect in the economy because people retrench and frugality takes hold. I think that's such an important point. One of the things about 2022, we had this huge correction in stock prices, but we never really had that infect the economy because hiring didn't really slow. And we had this mass wave of layoff announcements, but they were mostly coming from big tech companies,

which had done so much over hiring in 2020 and 2021, all they were doing was normalizing, not really cutting the workforce deeply like they would in a recession, but just getting back to a normal head count. The worry here for me, duration is right, Joe. The longer this takes to return to highs, that's where the danger lies, not necessarily the depth of it. The difference between a 10% correction and a 20% bear market, I think, is less important. I think having a stock market that goes nowhere for a year or two could be the type of thing that dramatically ends up changing consumer behavior, which admittedly we're not seeing

yet, has not happened yet. No, it's the ultimate is, do you want the V or do you want the U? If I told you that the stock market was going to drop 30% over the course of six months, and then 10 months from now, you're back to an all-time high versus the stock market's going to drop 10% and it's going to take you four years back to the all-time high, you're going to take the V shape in a matter of minutes. Think back to 2020. We made all-time highs in the stock market by August. Yeah. So let's put up this next chart because I think this is really interesting.

This is Americans all of a sudden being worried about losing their job. So putting the wealth effect aside, the most severe thing that can happen in an economy to produce a real bear market is obviously job loss. And it's the thing that makes a correction turn into a bear market and last much longer than it normally would. So when we talk about corrections, we kind of laugh it off. We haven't had a sustained correction in three years. Bear markets like 2022, if they're a company by job loss, they could go on for way longer than 13 months, which I think is what that bear market was. Michael, what are your thoughts? I think one of the things that investors do too frequently is you think about the last

time something happened and you assume that it's going to work out the same. So the soft data is turning south really fast. People are freaked out that they're going to get fired, that they're not going to make enough money, that prices are going to go up. And then you could say, well, who gives a shit what they say? Because they did this in 2022. In 2023, Kyle Scanlon famously called this a vibe session where the soft data was falling off the cliff and everybody's the economists and we're looking around like. The economy is OK like the stock market is in trouble, but so you you might be quick to dismiss this and say, ah, last time it didn't matter. But the economy today is a lot different than the economy when vibes were turning south. So it's a softer economy.

The hard data is starting to stall. And I think if people are actually, and forget about the whole survey issue, it's political, but whatever. But if people are actually worried about their job, they're going to change their spending habits and ultimately, how does that not impact the stock market? So we haven't seen that though show up. So real estate. What did he say?

The tariff stuff has been three weeks now, let's say, right? Okay. I don't know if we've got enough data to be able to say that this is more than just another vibe session. It might turn out that way. If we get some consumer spending prints, some monthly retail sales reports, and it doesn't show up, everyone's going to laugh this off and we could have a V-shaped recovery in the stock market, but we just don't know.

It's still too new. No, I think it's too new. I still think this is a recalibration back to normality. I would watch real estate. I think real estate values are maintaining at still a relatively high level and that's giving comfort. Whether that comfort's false or not, we'll find out. Yeah. When you heard what the CEO of Delta had to say about purchases kind of just dropping off and a real concern about the consumer, what were your impressions?

Because that's not a stock market guy. That's a guy who's living in the consumer discretionary economy in real time. That's also what we've heard from companies like Coles. We're beginning to hear that permeate. Target. Yeah. We're beginning to hear that. Let's say something that might be a little

bit uncomfortable though. That's a lot of lower income spending that's being pulled back. We haven't seen the affluent spending begin to pull back just yet. So, okay, maybe they're not flying on Delta, but they're still flying privately around the country. That's really what's driving a lot of the economy right now. Sponsor – Market Commentary Last week with Rob Arnott, I feel like market commentary always has a very short shelf life. Everything ages badly. Given the three months and everything we said looks dumb, but I feel like especially today, it is so hard to make economic and stock market predictions, as it always is, but today things

could change so fast. It's impossible. And just a quick thought on that, if you're investing around where you think GDP and the economy is going, honestly, I think that's absolutely ridiculous because people always say I'm afraid of a recession. All right, what recession are you afraid of? I'm more worried about an earnings recession than an economic recession because an economic recession, I think the Fed has a response to that, or at least they'll try.

An earnings recession, good luck figuring that out. Nobody's coming to save you until the earnings recession tips into a bear market, which creates a real recession. That could take quarters. Ask the Russell 2000 how they feel about an earnings recession. Well, they're in a bear market. Still. So let's talk about sentiment. It's hard to say that there was a washout given that stocks are 10% off the highs, but people are like bailing. So this is AAII from Sentiment Trader,

imperfect of course, as every survey data is, but there's only been two other times in the history of this data, this goes back a long time to the 80s, only two other times were the percentage of bulls less than 20 for three consecutive weeks. A bearish spike, but maybe even worse, people are just not psyched about the market. Well, I don't think they're psyched about the market because of the headlines. Whether you agree with the headlines or not, that's creating the contentious environment in which people are stepping back. Look, I also think, I don't know what you see, but I see a lot of different directions

if the road is blocked in front of you. I think you have alternatives right now. There are places that you could go where you could restore diversification. And when you think about asset allocation, you could go to some, what previously were unloved areas for that diversification, whether it's by asset class, geography, or strategically. So I think capital's moving in that direction and the road might be blocked in front of you, but you have alternative means of traveling. Yeah, one of the things that makes this feel not as bad for us as financial advisors compared to what went on three years ago is now we have the ability to point at a client's portfolio

to Joe's point and say, okay, the S&P doesn't look great, the NASDAQ doesn't look great. Thank God that's not your portfolio. It's a portion of your portfolio. So the German DAX up 19% year to date. When was the last time you've been able to say that to a client? Ever, maybe. It's got to be 15, 20 years ago. Merging markets positive on the year. China working and bonds are doing their job, which they did not do three years ago. Diversified portfolios do not look nearly as bad as the S&P. And that looks good for us because that's the business that we're in. Right.

By the way, I hate this clock up here. It's making me nervous. Don't get nervous by the clock. Stop the clock. I don't want to tell you what happened when it hit zero. But I don't want to blow up your show, but look, what's a benchmark anymore? I have people come up to me and say, okay, the S&P is down year to date. I'm like, that's your benchmark? What's a benchmark anymore? I have people come up to me and say, okay, the S&P is down year to date. I'm like, that's your benchmark? What's a benchmark anymore when you think about-

A benchmark is a wish that your heart makes. I don't know. So the four dumbest words in investing are tune out the noise. Tune out the noise. Well, what's the noise? I just tune it out. Yeah. Tune out the noise. Well, what's the noise? I just tune it out. Everything? But you do need to look past some of the headlines. And unfortunately, the media is gaslighting investors because they're looking for clicks. We know how it works. But specifically, there was an article in one of the publications this week that investors are bailing on buy and hold investing. And they gave two random people who sold out of their 401k, whatever. And then way down in

the article, it's like, oh, investors changed their asset allocation, their 401k by seven basis points. Everybody's freaking out. The headline is designed to get people to click. The headline was like, buy and hold doesn't work anymore. Right. And then you read down further in the article, actually, nothing's really happening yet. So what I like to do is don't listen to what people are saying. Watch what they're doing. And so Jim Paulson has this great chart. He said, investors say they are pessimistic, right? We're all very scared, but are still invested aggressively.

Again, this is AI data. The AAII average equity less cash position is still 50.5% compared to an average at past market swoon lows of only 21. whatever percent. Now I think some of this is structural. People were under allocated to invest in these back in the day. I think we've gotten smarter about long-term investing, but nevertheless, people feel scared, but they're still more or less invest in the way that they did previously. How does sentiment factor into the way that you view the market? Because when people say ignore

the noise, from my perspective, sentiment is among the noisiest data. And I know most of you guys know it's a great contrarian signal, but only at extremes. The problem is in 2025, everything is an extreme. When is it not at extremes? The market has a good week, everyone's a bull. Market is a bad week, everyone's a bear. I find it harder and harder to take anything away from sentiment, whether it's professionals or retail investors. How I utilize sentiment and positioning and discovering how I could reflect upon both,

I'm going back to my prior life now, trading in the oil markets and trading a variety of different things proprietary, but you use sentiment and positioning to measure risk. And we haven't mentioned the word risk once so far this entire show. And to me, this whole business is about risk. I don't care how smart you are. I don't care where you've been educated. If you don't know how to measure risk, reshape risk. You never eliminate risk.

That's BS. I hate when people say that. You reshape risk. But if risk is not your primary word in this business, you are going to have a problem ahead of you. So I look at sentiment and I look at positioning. I say to myself, okay, 60 days ago, overwhelmingly bullish, right? I don't even know what we call it, golden age in America, whatever it was, right?

60 days later, it's like American exceptionalism is dead. You want to go everywhere else except here. To me, that means in terms of risk, you are very judicious in how you're allocating into the markets because you have that extreme surrounding sentiment. Yeah. I don't think we've seen a shift quite this profound. We went from the election, we rallied into it, we rallied after it, and the stock market just absolutely exploded. All 11 sectors were trading higher.

Then the analysts started to ratchet up their earnings expectations for this year, and everybody was talking about deregulation, continued tax reform, and then a couple of tweets about tariffs and the entire thing flipped on its head. Nobody's talking about any of those potentially positive things. It's just risk now. It's all risk. And professional investors will step back in that environment. And that's why when I say you want to be very measured in your dispensement of risk into the marketplace. 60 days ago, US-centric investments were favored, higher dollar, we had technology,

innovation, momentum was the leading factor. That's where you want it to be. 60 days later, ignore the US, lower interest rates, lower dollars. Hi, China. Right. Forget about AI and innovation. It's not happening. Yeah. So I think- Put this options chart up. Okay. Because this is professional investors, in my happening. Yeah. So I think- Put this options chart up. Okay. Because this is professional investors, in my opinion.

Yeah. So what we're looking at is, this is from Subutrade, the dollar value of put volume, and actual people that are putting risk on the line freaked the F out and bought a lot of protection as the storm was coming on shore. I don't think this is- I don't think a big component of this is retail. I don't think retail buys puts. Now they do. I think they buy 2X negative ETFs. I really don't think that this is heavy retail.

I think this is professionals. What do you think, Joe? I think the option market right now is something that a longer term investor needs to completely ignore. Ignore. Completely ignore. I think the market structure has changed so dynamically, I have no clue why we need zero dated options. I don't understand the importance. For the lols. Right. Like what's the importance of zero dated options? So I think the options market has become so convoluted. And if you're looking at the option market for some longer term investing signal, boy, you're going to be misguided. I agree, Joe, but I hate to say you're wrong,

Josh, in front of your family, but you are wrong because- My wife is here. And your daughter. What's he wrong about? This. That retail investors are not trading the shit out of options because they are. And Robinhood's earnings... I think they are, but not puts. And Robinhood's earnings reports, you saw how much money they make from options. But don't you think that's all out of the money calls on Palantir? I don't. You think that's SPY puts is retail? I do. I mean, not only obviously. Do we have anyone here from Robin Hood who can Invalidate what Michael is saying let me let me ask this stage left

Let me ask both you a simple question your children come to you and they say I'm going to be a Options day trader. What do you say to them? No Exactly, definitely 100% not okay, so just I'd rather you be an actor. One of the things in my estimation that led to the unwind is that everybody was on the same side of the boat. Everybody was all pulled up coming into 2025. And so that got unwound in a hurry. And last week, there was a report from Greg Zuckerman who covers hedge funds. And he said that on Tuesday morning Goldman Sachs sent a note to clients saying stock picking hedge funds just endured their worst 14 day period since May 2022. Quote, we have started to see large and broad based risk on wines.

Our best guess is that we are currently in the middle innings of this episode." End quote. I also saw some people talking about like an index rebalance that said everything kablooey, but do you think it's as simple as people were just way too complacent, way too comfortable and offsides and over leveraged and etc.? I don't ever think the market is that simple. I don't think the simplest explanation is generally the right one. I think we live in a very complicated market structure. So no, I wouldn't say that. I think, again, what really has happened is that a lot of the money that's being redistributed

in other places is not so much passive long-term capital, but it's more the quantitative strategies which are growing exponentially. And they're just trying to capture alpha because the last several years, they could chase the beta, they could worry about what the MAG-7 are doing, buy the index, and they're good. Now they actually have to roll up their sleeves and have to work. Joe, you're right. It's never that simple. But Millennium, one of the giant pod managers, lost 1.3% in February, I guess. It's worse month in over six years. So there was a lot of selling pressure.

Do you believe that story that the pod shops were very overly concentrated in Coinbase, Robinhood, Reddit, they all had the same trades on and they all liquidated at once? Netflix was a full on liquidation. Remember we were talking about that one day? We're like, why is Netflix down 9%? Yeah, Netflix should almost be a consumer staple. I have no idea why it lost 20%. When the selling stopped, it came ripping all the way back. Yeah, that's one of the first ones to come back. So do you believe that story, the concentration of momentum stocks by the millenniums of the world and just everybody

all at once saying, okay, that's it. Take down leverage, take down positions. Well, I think you have to understand how market structure has changed. And look, I try and talk about this on CNBC. I think you agree with me on this, but on a daily basis, I don't know what percentage is just quant money moving around 80%, 85%. I actually think it's that high. Indifferent to fundamentals.

They're just looking at price. All it is is we're looking at price. I mean, you could come on CNBC or any business media and talk about valuation and growth at a reasonable price and whatever fundamental metrics you want, but the majority of capital right now, they're not looking at that. Do you know what right now a quantitative information solution is? No. Do you know? QIS? Yeah.

Oh, sure. Okay. But why don't you explain it to everyone? Okay. So it's one of the most popular strategies right now at JP Morgan and some of the other wirehouses. And it's trying to basically give exposure to these quantitative strategies to the retail community. And it's growing again exponentially,

but it's driven and its focal point is one single thing, price. So whatever stocks are going up, all the money coming in is going into that basket. They're not going to go the other way and sell the ones going down. Yeah. So Joe, you have a chart from Vertis showing historic level of concentration in the S&P 500. And investors love this on the way up. Advisors probably didn't because we had to apologize for not having all of our portfolio in the queues. But investors love this on the way up and they might not love it on the way down.

What's going on in this chart? Well, we've reached a level where the last couple of years for sure, if you are a portfolio manager, you've underperformed. It's plain and simple. If you're doing anything that deviates from the triple queues, you're trailing. Anything. Or over the long run, you should probably be fired because what you're doing then is you're concentrating in the direction of seven stocks. And is that how you build a portfolio? I don't think so. So I don't understand why, in particular in the wealth management industry, why people are upset seeing the mag seven down. I actually think it's really good. We finally broke the fever of the last several years and now you could reintroduce the word, okay, I could diversify. Now, okay, the other 493 can actually help me

after the last several years really doing nothing. Yeah. I think that story is 90% the case. The 10% that's not is for some reason the mag seven have lost, I think the number is like three trillion and the overall market has lost five trillion in value. The problem is that small caps are down worse. This is what I think makes it so difficult to be giving advice right now, making people feel better about their investments, their portfolio. On the one hand you you say, hey, remember you kept telling me about your golf buddy who's riding Tesla and Nvidia and how come you don't own more Nvidia and blah, blah, blah? Call him today, ask him how he's doing. And then the person says,

yeah, but look at the Russell. So that's the fly in the ointment. But 90% of that I do think is true. I think if you were to poll this audience, almost nobody here is cheering about seven stocks going up 100% every 18 months. Or putting their clients in a specific seven-stock concentrated portfolio. All right, so to keep the conversation going, we're gonna skip over this next chart. I wanna go, let's talk about momentum and trend.

So again, a chart from Vertis, we're looking at the assets under management and the Morningstar systematic trend category. Why do you think advisors and investors are so under allocated to trend and momentum relative to something like value? What's the dollar amount on this? This is- It's 20 billion. That's- 20 billion is a very small sub-asset class. How much money is in IWM, for example? You know what I mean? This is not a lot of money. Why do you think this is the case? So if you look at the

managed futures industry and we have a slide... I don't know if you have this slide, Michael. It's down a little bit further. So here you're talking about nearly $350 billion in the managed futures industry. That doesn't make sense to me. $350 billion in managed futures, $20 billion in momentum. It sounds like one is really misunderstood. So I think what it just speaks towards, it's like, okay, what's the message? Why are you showing these charts? And I think it's important to just set an expectation

so that people really understand how the environment has changed, how market structure has changed. And I think when you begin to understand that, you say to yourself, okay, automatically, where we are today, people are like, all right, equities go down 10% in six weeks. I want to buy them. V-shaped recovery, right? Okay. Well, maybe it's a you. Maybe to your point, it's more of a you. And let's set that expectation. Why is it a you? Because all this systematic trend following capital, when they have that dramatic reversal in momentum and they begin to lose money, they pull back. They pull back on risk. They take less risk in the hole than they take at new highs.

Absolutely. So if Millennium is down 1.3%, they're not buying zero dated options in the month of April to get it all back. They're actually doing proper risk management and say, okay, guys, let's take a step back. Yeah. I mean, this goes back to like SAC, Steve Cohen stuff. Like get out of everything, or Ken Griff, and the same thing. When in doubt, when you're in the hole, we don't add to the problem, we don't make new mistakes,

clear the decks, let's start over. And I think there are risk managers at these funds that are putting that into practice. It's not, let's trim. No, no, no. Out. Let's see what happens next. So I'll tell you a real quick story. I'm at Casa Cipriani in New York, one of Josh's favorite places. Shari, you like Casa Cipriani as well. I'm sitting there and three traders from Jane Street are eyeballing me. And I'm like, okay, they're coming over at some point. Is that because of your olive skin or?

Oh, it's my tan, the Sicilian skin. So they come over and they start talking about CNBC, this, that, that thing. And they say to me, I say, how are you guys doing? And this is in early 2024. And they're like, oh, we're on pace to make about $18 billion this year. I'm like, wow, that's pretty good. How'd you do in 2023? We made about $15 billion, 2024 looks a little bit better. I said, oh, how'd you do in 2022?

We made $9 billion. Think about that. Yeah. And no one made any money in 2022. What's the point of that story? The point of that story is the proliferation of these quantitative strategies into the marketplace. And you have to absorb that.

You have to understand it. And you have to allow it to shape your expectation in terms of what the market ultimately is going to deliver. So I want to talk, Joe, about what do people do when momentum breaks in their favorite stocks? Before we get there, I just want to give you some flowers, your strategy versus another popular momentum strategy. Joe T has outperformed. What's the track record in terms of life? Hang on. Round of applause for Joe T. Let's go. We're not selling product here, obviously.

I'm just saying. Is this three years, five years? So it'll be five years in November. So to be very clear, one of the big fundamental differences between what you're doing versus what most pure momentum funds are doing is a quality, is overlay the right word or a quality sort where you're looking for not just momentum stocks, but the good companies that are underlying those stocks. I want you guys to zone in on this chart for one second. Josh, Michael, you guys will both like this.

Let's look at important factors and performance for the market over rolling timeframes. What stands out to me? What stands out to me is quality basically is a winning factor. We would agree with that, right? I think everyone in this audience, if talking to clients and describing what they're investing in, think they would all lean into quality. We're buying quality companies. This is a quality portfolio. I think that's universal amongst wealth management. Who would say the opposite? Yeah, nobody pitches dog shit. Okay, good. So now, next to quality, which is the first bar, the Navy bar, the gray bar

is your momentum. Pretty good returns, we agree? Yes. So you've got these two popular factors. Now, trace your eyes to the right and you've got that little cranberry spike coming from what? That's your S&P growth. My belief is that markets have become more growth than value. So here's what I do. I say, okay, momentum is a single factor, Josh. It's not enough.

I need something else. Let's combine quality and momentum. But the nuance is I don't like how you and the financial services industry describe quality because your quality sometimes means it's a value trap. So my quality, what I introduced is one of the important criteria is what is your revenue growth over a 36-month period? That's really important to me.

Can you deliver consistent revenue growth over a 36-month period. That's really important to me. Can you deliver consistent revenue growth over a 36-month period? That's factored into how we look at quality. The end result of that is I now have four important factors, momentum, quality, and growth all combined into one and equally weighted. What's the worst market environment for a strategy like that? It strikes me as like in 2021. 2023. 2023. 2023?

2023. Why? So, because seven concentrated stocks are galloping higher. Worst possible scenario. I was thinking more of like a market where like the leading stocks are companies with no earnings, sometimes no revenue. Like 2021. 2021, yeah.

2021 was a very strong year. Okay. Because you still had the momentum. I'm proud, most importantly, of 2022 and so far this year, because we can utilize the strategy in almost a defensible way. If you think about it, what are we doing? We're taking momentum and we're using the blessing of diversification in that actual strategy. I'm saying I want to combine everything all together, throw it all in the pot. I want momentum, I want quality, I want growth, I want equal weight.

The benefit of that is in an environment like 23 where the market's galloping higher, okay, I give up a little, I'm fine with that. On the other side of that, I find myself in a much better place and that allows me to manage the volatility. So let's go back to what happens when momentum breaks and all of this growth. I don't know if people could see, presenting rolling five-year periods of outperforming, growth has outperformed 69% of the time. Nice. Thank you. Okay. So Joe, last week, two weeks ago, massive break in momentum stocks, Nvidia, Palantir, Reddit. We have a chart of Nvidia.

What do we do? When momentum breaks, is it gone? Is it trade over? Joe Bumriff When momentum breaks, generally what happens is that you go through a period that looks like a U. So I keep saying on air, Applove and Palantir, stocks like that, don't look for the V-shaped recovery there. I don't think you're going to get it because capital steps back on the sidelines in particular from a lot of these quantitative strategies. What we're looking at here in Nvidia, if you have that Nvidia chart,

is just the recognition of, remember, this is rules-based. Josh, I know you love a rules-based strategy. Okay, full disclosure. Everyone see that little circle? That's April 30th of 2023. So in January of 2023, the strategy goes out of all the Mag-7 names. And that was consistent with what you heard from the 13 Fs with all the hedge funds. Everyone was selling them at that time, if you remember. Okay, April 30th, 2023, right back in again. There's no way if I'm sitting there with the discretion behind the computer that I'm pulling the trigger and doing that. That's a hard trigger to pull.

It's impossible to buy back. It's impossible to buy back something you've just sold if you have to sit there and reason through it. You need the rules to do that. No way I'd do that. So here's the double-edged sword with rules-based. And I think everyone here could relate to this. You tell a client, this is a rules-based allocation. I'm not going to freelance.

I'm not going to jump in there and start pulling wires out. I'm going to let the strategy do what it does. And then you get a momentum break like what we just had in the last three weeks. The problem is if you're rules-based, you still own the once hot stocks. Now they're all going down. Change the rules. But you can't sell... We tell a funny story about a manager who said, there are 19 rules, but if some shit is going down, don't worry. We'll do what we got to do. That's not really happening. You can't do that because you're an ETF. Everyone's watching

your fidelity to those rules. So now- No problem. That's the double-edged sword. No. We rebalance and reconstitute on a quarterly basis. And you do what you got to do. Do what we had on April 30th. The strategy will do what it needs to do. But the rebalance and the reconstitution on a quarterly basis is incredibly important. It's a long time till April 30th.

It's okay. You pull up a chart of Palantir for one second. Would you ever sell a momentum stock that goes absolutely vertical? Yeah. Is that like dangerous? Palantir. Yeah, Palantir. Exactly. All right.

So if you're asking me as an individual, of course I would have sold it. You see that spike? So on January 31st, 2024, we enter Palantir at $16. We ride it all the way up. Now, we rebalanced and reconstituted at the end of January, so we sold some. The position size probably got to 1.6%. We took it down to 87 basis points. You see that run up? If I'm sitting there at the computer, you and I, you know how many times we would have sold it? You would have sold it 10, I would have sold a 15. If I'm in 16, I'm out at 22. What a trade.

Michael is not rules-based. No. All right, where are we going next? So actually, this is a wonderful slide showing how your sector exposure via the rules can change over time. Momentum is like a chameleon. It can go wherever the prices are moving. So what I often say to people, and Josh can appreciate that, and I'll talk a little bit about Josh and I's golf game

in a second, but I'm playing golf last summer, and a financial advisor comes over to me and says, you know, I love your ETF. I said, why? He said, you guys talk about all these stocks on CNBC, and my clients call me up at the end of the day, say, do you own XYZ stock?

I used to have to deal with that conversation. He goes, now I just go, yeah, I own Terra Nova's fund and it's all in there and you have guardrails because you equally weighted. What this is showing is what I love about what we do with the strategy is it takes the personality of the market. If you look at this, you'll see how financials, which are the Navy line, and you see that acceleration, it bottoms out in July of 23. Can you see that, Michael?

Now we increase exposure to financials. We begin to reduce exposure, the green line, to healthcare, and we begin to reduce exposure to information technology. So it kind of takes the personality of the market. So the next rebalance in April, I'm excited to see what it does. You're buying healthcare. Because it, well, we'll see, it takes the personality of the market. So I'm guessing you're probably reducing some areas of tech and media, and you're probably

adding healthcare just purely based on where the momentum in the market is. Rules-based, Josh. We'll see what the rules do. We'll see what happens. You're going to end up with a big bag filled with Gilead, Sciences, and a handful of stocks that are going up. You know what's interesting? I know him very well. We think alike, and I appreciate so much about him, but I think if you were to develop a strategy, you would develop something similar. I think I would too. I really believe that. I wouldn't let Michael anywhere near it.

I want to leave the crowd with something from your career, something that you've learned, something that's been meaningful to you and your success that you think everybody could benefit from hearing? Look, I'm getting older. I've been in this business. It's obvious. I've been in this business a very long time. People always say-

How long? So I graduated St. John's January of 1989. There you go. So I think what I've learned in this industry, more than anything else, people always, I do these calls with financial advisors for Vertis at the end of the day. And then they'll say to me at the end, so what's the one thing we didn't ask you or what keeps you up at night? Like I'm doing this 30 years. I'm not staying up at night over the market. So your first loss is your best loss. I've always said that. Your first loss is your best loss. There's no loss that you can incur in this industry that's going to exceed the loss that you might experience in your personal life. And yes, this is important to all of us,

but you can't take it that serious. You just can't because history teaches us that we will always recover from periods of volatility and periods of corrective behavior. And I think that type of balance, as I've gotten older, is something that I'm blessed with. Shout to the guy who walked by, lowered his glasses, looked at us, and kept walking.

Thank you, sir. That was awesome. Ladies and gentlemen, Mr. Joe Terranova. Give him a round. Thank you so much, Joe. Hey, I want to end by just saying thank you guys so much for listening to the Compound and Friends and Animal Spirits and all the stuff that we were doing on the channel.

It's millions and millions of views. We never ever take your attention for granted. We know this is an attention-based economy and every time we hit publish, we have to make sure that we're delivering something to you that continues to earn your attention. So thank you so much for paying attention to our stuff, keeping us in your lives. We appreciate you. We love you.

Thank you and have a great, great event. you